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Pros and cons of using an umbrella company

Advantages of working for an umbrella company

It is important to stress that many umbrella companies operate in a totally legitimate manner and can bring a number of important benefits to workers.

Stable employment

Work opportunities in certain sectors (e.g. construction) are likely to be time limited, ending when a particular project (such as building a new office block) has been completed. This lack of long-term job security can be a cause of stress to workers and make it hard for them to plan for the future (especially as they may be unable to obtain mortgages and loans). Being employed by an umbrella company can offer a way of overcoming this problem by providing continuity and stability.


As the umbrella company is the employer, its workers receive a number of statutory benefits including sick pay and maternity (or paternity pay) which would not be available to a self-employed individual.


Working for an umbrella company takes away responsibility from the worker for issues such as tax and National Insurance payments. An umbrella company will use its expertise to ensure workers meet all statutory obligations, so avoiding the risk of HMRC issuing a fine or launching a full investigation.


While umbrella companies will charge for the administrative support they provide, many are able to use their size and efficiency to keep the cost low compared, for example, to the charge for a self-employed person hiring their own accountant.

Problems that can arise from using an umbrella company

There are, however, a number of potential disadvantages of working for an umbrella company.

Tax avoidance scams

Each year a significant number of umbrella companies are found to have been operating illegal schemes designed to reduce their liabilities to HMRC. An individual employed by such a company (even if totally unaware of any illegal activity) could find themselves subject to severe penalties.

Loss of payments

Disreputable umbrella companies may not only seek to defraud HMRC – they may do the same to their own employees. A well-known scheme is connected to holiday payments. Some umbrella companies withhold part of their employees’ regular salary in order to provide holiday pay at the appropriate time. Should a worker not use all of their entitlement (or end their employment before the end of the holiday year) an unscrupulous umbrella company may keep the funds for itself – defrauding the worker of money that was rightfully theirs.


Whilst an umbrella company employee does have some stability, this is far less than what a traditional permanent employee working directly for the end-user, would benefit from. There is no guarantee of continuing income as this is dependent on the umbrella company (or a recruitment agency with whom it collaborates) being able to arrange suitable work opportunities.

HMRC and umbrella company fraud

A major disadvantage for any business that is part of the supply chain of an umbrella company is the possibility of getting caught up in an HMRC investigation – even if the business has been unaware of any fraudulent activity taking place.

As the number of umbrella companies (and so the potential for fraud) has increased significantly in recent years, so HMRC has stepped up its efforts to combat scams.

This led to it updating its guidance to businesses in 2022 in a bid to ensure that they are aware of the danger signs that could suggest fraud is taking place, and of the consequences of working with a company that is breaking the law.

What tools does HMRC have in combatting umbrella company fraud?

Raising awareness

As stated above, HMRC has issued advice to businesses on how to spot that fraud may be taking place (including unusual company names, foreign directors and frequent movement of workers between different umbrella companies).

In addition, HMRC works closely with other government departments and industry bodies to increase understanding of the issue.

Limited Cost Trader legislation

Introduced in 2017, this has helped HMRC combat abuse of the VAT Flat Rate Scheme by imposing a new rate of VAT for businesses below a certain threshold.

Formal investigation

Where HMRC suspects wrongdoing, it has the authority and resources to launch an investigation of the umbrella company concerned. Should illegal activity be proved, it has the power to deregister the company – and has done so in tens of thousands of cases.

In addition, the consequences can be severe for any other business which (even unwittingly) has been part of the supply chain of workers.

Measures available to HMRC include:

  • All companies that have been part of the supply chain can be issued with an accelerated payment notice, obliging them to pay all tax and National Insurance owed within 90 days
  • Any company that does not comply with such a notice will be liable to legal action. If HMRC wins the case (as it does over 90 per cent of the time), the company will also have to pay legal costs, interest on its debt and possibly a further financial penalty
  • It can prevent all companies in the supply chain from recovering VAT input tax
  • Companies connected to the scam can be named and shamed online – causing reputational damage and potentially making it more difficult for them to operate in the future
  • A company found to be part of the supply chain is likely to be treated as a high-risk tax payer in future and be subject to ongoing close scrutiny of its affairs from HMRC

Where can I get legal advice over umbrella company fraud?

We have seen above that the consequences for a company caught up in umbrella company fraud can be life-changing.

In addition to the huge financial costs, being part of an H/01/MRC investigation can be a highly stressful experience.

It is vital, therefore, to obtain expert legal advice as soon as possible.

Richardson Lissack has the expertise to help you at such a difficult time. Please call on 020 3753 5352 / 0161 834 7284 or complete our online contact form.




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